10-QPeriod: Q2 FY2012

ADOBE INC. Quarterly Report for Q2 Ended Mar 2, 2012

Filed March 30, 2012For Securities:ADBE

Summary

Adobe Systems Incorporated's (ADBE) 10-Q filing for the period ending March 2, 2012, reveals a company navigating a transitional period with mixed financial results. Total revenue saw a modest 2% increase year-over-year, reaching $1,045.2 million. However, this growth was primarily driven by a significant 38% surge in Subscription revenue, which grew to $146.2 million, and a 15% increase in Services and Support revenue. Conversely, Product revenue experienced a 4% decline, falling to $808.5 million, attributed by management to customers delaying purchases in anticipation of the upcoming Creative Suite 6 (CS6) launch. Profitability metrics showed a decrease, with Net Income dropping to $185.2 million from $234.6 million in the prior year's comparable quarter, leading to a decline in both basic and diluted earnings per share. This was influenced by a rise in operating expenses, particularly a 9% increase in Sales and Marketing costs, and a higher effective tax rate of 31.5% compared to 18.0% in the prior year, largely due to one-time tax costs. The company also reported a substantial increase in Goodwill, largely from the acquisition of Efficient Frontier, signaling a strategic push into the Digital Marketing segment, which saw a robust 22% revenue increase. The company ended the quarter with a strong liquidity position, holding $801.3 million in cash and cash equivalents and $1,964.9 million in short-term investments.

Financial Statements
Beta
Revenue$1.05B
Cost of Revenue$108.27M
Gross Profit$936.96M
Operating Expenses$647.98M
Operating Income$288.98M
Interest Expense$16.84M
Net Income$185.21M
EPS (Basic)$0.37
EPS (Diluted)$0.37
Shares Outstanding (Basic)494.02M
Shares Outstanding (Diluted)500.38M

Key Highlights

  • 1Total revenue increased by 2% year-over-year to $1,045.2 million, driven by strong subscription growth.
  • 2Product revenue declined by 4% to $808.5 million, with management citing anticipation of the CS6 launch as a key factor.
  • 3Net income decreased by 21% to $185.2 million, impacting earnings per share.
  • 4The Digital Marketing segment showed robust growth, with revenue increasing by 22% year-over-year.
  • 5Acquisition of Efficient Frontier contributed to a significant increase in Goodwill and bolstered the Digital Marketing segment.
  • 6The effective tax rate increased significantly to 31.5% from 18.0% in the prior year, impacting net income.
  • 7Adobe maintained a strong liquidity position with $801.3 million in cash and cash equivalents and $1,964.9 million in short-term investments.

Frequently Asked Questions

Adobe's revenue growth is primarily driven by a significant increase in Subscription revenue (up 38%) and a solid rise in Services and Support revenue (up 15%). However, Product revenue has declined by 4%. Management attributes this decline to customers delaying purchases in anticipation of the upcoming launch of Creative Suite 6 (CS6).

The acquisition of Efficient Frontier, completed in January 2012, contributed to a significant increase in Goodwill on the balance sheet and drove revenue growth in the Digital Marketing segment, which saw a 22% increase year-over-year. The financial results of Efficient Frontier are included in Adobe's condensed consolidated financial statements from the acquisition date.

The effective tax rate increased to 31.5% from 18.0% in the prior year's comparable quarter. This rise is primarily due to one-time tax costs associated with licensing acquired company assets to Adobe's trading companies. The prior year's rate also benefited from federal research and development credits that expired at the end of 2011.

Adobe maintains a strong liquidity position. As of March 2, 2012, the company had $801.3 million in cash and cash equivalents and $1,964.9 million in short-term investments, totaling over $2.7 billion in readily available funds. Working capital was $2,390.6 million.